These are obviously turbulent economic times, and we wanted to know how much the turbulence is affecting sport. So we’ve put a few questions to Andrew, including one (the first) from a reader named Kenn Fong.

Thanks to Kenn and Andrew. Perhaps, if you leave more questions in the comments, we can persuade him to answer a second round.

The new Yankee Stadium under construction. (Photo: Tyler Kepner/The New York Times)

What do we really know about a sports team’s value to its community? I am wondering whether a community should pay for a venue for its team. Here in Alameda County in California, we are still paying for the Oakland Coliseum renovations, which were used, along with guaranteed sell-outs, to lure the Ray-duhs back from Los Angeles. Thanks, Kenn Fong.

The question at hand is phrased broadly: What is “a sports team’s value to its community?” The answer is clear. Beauty is in the eyes of the beholder. All of the independent, scholarly research on the issue of whether sports teams and facilities have a positive economic impact has come to the same conclusion: One should not anticipate that a team or a facility by itself will either increase employment or raise per capita income in a metropolitan area.

Generally, the reason for this is threefold. First, most of the spending at a stadium or arena is from residents of the metro area; as such, it is simply redirected expenditure within the local economy, e.g., from the bowling alley or restaurant to the ballpark. Second, much of the income generated by the team leaks out of the local economy, as owners and players save a substantial portion of their earnings in the world’s money markets or spend their income outside the host city. Third, in the typical case, the city and/or state contributes roughly two-thirds of the financing for the facility’s construction and takes on obligations for additional expenditures over time.

However, in many more recent cases, the owner of the team agrees to pick up a larger share of the ballpark financing and/or to invest in development projects around the stadium or arena. In these instances, it is possible to anticipate some development benefits, but the devil is in the details.

If pro sports teams cannot be relied upon to promote economic development, as the literature suggests, is it still sensible for a community to provide public funding to support the facility construction? It depends.

Cities spend millions of dollars to support a variety of cultural activities that are not expected to have positive economic effects, such as subsidizing a local symphony or maintaining a public park. Sports teams can have a powerful cultural or social impact on a community. If that effect is valued by the local residents, then they may well decide that some public dollars are appropriate. However, if the public or its political representatives are trying to make the case that a team or a facility by itself will be an important development tool, then the electorate should think twice before opening its collective wallet.

Pro sports have a variety of revenue streams, of course, including ticket sales, concessions, licensing, and ad revenue both from the broadcasting of games and via corporate sponsorship. Given the current economic hard times, how much pullback will there be in advertising and sponsorship as well as other revenues, and how broadly (and how long) will that affect sports teams?

Generally, the sports industry has been insulated from mild recessions. This is due to the fact that, depending on the sport, there are long-term contracts that guarantee revenues (e.g., four- or five-year television deals), and fans tend to give up other consumption before they cut back their consumption of sports. The present downturn is, however, both much more severe and likely to last considerably longer than the typical post-WWII recession. Moreover, the revenue-generating model in pro sports has been gentrified over the last 20 years, becoming more dependent on the sale of premium seating, corporate sponsorships, and catering — all expenditures likely to be more sensitive to economic conditions.

Baseball was the only thriving team sport during the 1930’s. Its attendance fell 40 percent between 1930 and 1933. No one should assume that professional sports today will not be significantly impacted by the present crisis.

Some sports, like NASCAR, will be affected more acutely. NASCAR racing teams receive over 70 percent of their revenue from sponsorships and the lion’s share of this is from the automobile industry. There will be a major impact here. Other sports — like the N.F.L., which receives over half of its revenue from national television deals that last through 2011-13 — will have a softer landing; but even in the N.F.L., certain teams will be heavily impacted.

The NY Giants, for instance, are building a $1.6 billion stadium with the Jets. Much of the financing for this facility has come from auction-rate bonds, a market which collapsed and, consequently, interest costs exploded. The Giants lost their protection from this interest rate explosion when Lehman Brothers went bankrupt. Some estimates have put the Giants cost at near $100 million from the Lehman collapse. A team in the W.N.B.A. closed its doors, tournaments have been eliminated from the L.P.G.A. tour, and the Arena Football League has suspended its next season. N.B.A. teams have used deep discounts on tickets to maintain attendance. The offseason players’ market in M.L.B has been somnambulant.

The question of how deep these cuts will go and how long they will last is an imponderable. One might as well ask Ben Bernanke or Hank Paulson these questions about the U.S. economy. The answers depend on macropolicy in the U.S. and the rest of the world, as well as currently unknown behavior in financial markets. What we do know is that the sports industry will reflect, perhaps with some moderation, the vicissitudes of the overall economy.

It would seem that guaranteed vs. non-guaranteed salaries is the biggest difference between N.F.L. and other sports leagues; true? How can there be such a gulf, and how does this issue affect the games?

It is true that there are virtually no long-term guaranteed contracts in the N.F.L., but, in their stead, N.F.L. teams offer players substantial signing bonuses. Together these signing bonuses can amount to half or more of total player compensation.

What do you make of the Yankees committing to nearly $.5 billion in contracts this off-season?

The Yankees spending certainly stands out.

The Yankees need their $1.3 billion investment in their new stadium to pay off. It will only pay off if they fill their stadium and its high-priced seats. The best way to make this happen is to put a competitive, compelling team on the field. The economics of running the Yankees is different than that of any other ball club.

It should also be pointed out that the Yankees are playing by baseball’s rules, which included the team paying over $120 million in revenue sharing and over $20 million in luxury taxes in 2008. The Yankees are playing a high-stakes game, especially in this weakened economy. It may pay off and it may not.

john

January 9, 2009 @ 8:26pm

Despite the recent Yankee signings, aren't they still operating on a lower payroll than last year?

Duke

January 9, 2009 @ 8:32pm

What can a local government (city or state) do to align its economic interests with those of a pro sports franchise so that it stands to benefit economically from shelling out millions for new stadia and infrastructure? An arrangement that is clearly mutually beneficial seems like it could work well for both sides as taxpayers don't feel fleeced by their teams' owners and the owners benefit from public funding and a fan base that is now financially (in addition to emotionally) invested in the team's success.

mfw13

January 9, 2009 @ 8:35pm

With the BCS just finishing last night, I was wondering how many of the "minor" bowl games do you think acutally made money this year? TV ratings and attendance were both fairly mediocre this year from what I've heard, and with just about every team with a .500 or better record getting invited to a bowl, there were some truly horrendous matchups from a marketing perspective. Do you expect all of the bowl games to survive, or for several of them to disappear by next year?

Jeff

January 9, 2009 @ 8:51pm

Is parity good for a pro sports league's finances or is it better to have the big, bad villain like the Yankees?

Ajay

January 9, 2009 @ 8:53pm

Does hockey seem to be the most vulnerable of the team sports in this climate (with the dependence on gate receipts)? What do you see as the worst case scenario?

Tenorca

January 9, 2009 @ 9:06pm

As an addendum to Ajay's question, which league is the most stable and why?

Leigh Caldwell

January 9, 2009 @ 9:10pm

I wrote this slightly tongue-in-cheek article a few months ago about the British government's investment in the Olympics, and whether it was economically worthwhile:
http://www.knowingandmaking.com/2008/08/economic-efficiency-of-sport.html

Cultural investments are a good comparison. If there is an economic benefit to sports and the arts, I suspect it is in the greater tendency towards cooperation and trust that may be shared by a population committed towards some common goals or shared interests.

Are you aware of any economic research on these subjects or any attempt to quantify these effects?

Scott

January 9, 2009 @ 9:17pm

Do you think college athletes should be paid? (in particular D1 Basketball and FBS?)

Dan

January 9, 2009 @ 9:35pm

Can cities make a convincing argument for using public money on a stadium that doesn't require inflated (phony) economic impact numbers? It seems as though citizens demand these reports to justify their taxes and then, when the stadiums are built everyone is pacified because of the tangible social benefit to having a sports team and venue. Is there a credible way to cut out the middle man to allow a city to promote a new stadium on its social merits alone?

ringo

January 9, 2009 @ 10:07pm

The cultural benefits argument for publicly funded stadiums only seem to make sense in the case of buildig a stadium for a team that is brand new or relocating from a different city. If a stadium already exists, using public financing to build a newer stadium surely wouldn't add much cultural capital. It's the act of mutually supporting the team that's important, not the availability of sushi stands and luxury boxes. All it does is add the luxury boxes and premium seats whose profits go straight to the wealthy ownership.
If a stadium is becoming completely unusable it might be different, but how often is that actually the case from the perspective of the average fan?

IMO at least.

Bobby G

January 9, 2009 @ 10:26pm

Stadium building and revenue return on investment is kind of a touchy issue when it comes to taxpayers. Even in investments where long term profit (or return) seems highly probable, taxpayers will resist. They are essentially subsidizing future generations. Considering a metro area where those future generations are not necessarily the current generations' children, things can be even more tricky.

With a sports stadium, I like the analogy to a city park... it's something aesthetically pleasing to a community that also happens to be a business. Despite the social merits, how many of us would be happy to pay for a billion-dollar sports arena that will take 10 years to build? Are we going to be living in the area to appreciate the stadium once it is built? What if we're only going to be around for 15 years... 10 years to build and only 5 years to appreciate it? Is that really worth it?

Ideally the cost should be imposed upon the people who will use it... i.e. the citizens in 10 years. Public funding doesn't work like that (can't?), however, so citizens and politicians alike must deal with the economic consequences when it comes to issues like this.

As for the struggling economy... I know I still have a lot of fun watching basketball. Hopefully as corporations cut costs, they'll stop buying season tickets and inflating those prices. Even though they're terrible this season, I still love watching the Warriors. I just do not value nose-bleed seats at $55.

Read more...

Norman Oder

January 10, 2009 @ 3:56am

Maybe Prof. Zimbalist can tell us if he's reconsidered his deeply flawed report commissioned by developer Forest City Ratner touting the Atlantic Yards project in Brooklyn.

For example, why did Zimbalist suggest that the project would simply get as-of-right benefits when the city Independent Budget Office said differently?

Why did Zimbalist count the income taxes from new residents as new revenue--a tactic disdained by other economists?

Kenn Fong

January 10, 2009 @ 9:25am

My question about the worth of the Oakland Ray-duhs (referring to the faux Southern accent used by the Brooklyn-born owner, Al Davis) to the community refers to the severe financial crunch the city of Oakland and Alameda County has had since before the team returned from Southern California in 1995. The investment/bribe to Al Davis to bring the team back came at the cost of hiring and training teachers, police, firefighters, EMTs, and other public safety and quality of life issues. When trying to attract businesses to relocate in the area, I wonder how much premium is place on the number and type of professional sports franchises as compared with the crime rate, standardized testing scores, and general quality of life.

Eric M. Jones

January 10, 2009 @ 3:25pm

I am not a sports fan. I agree with Winston Churchill--"No sports."

I am also very much opposed to the use of public tax dollars to pad the pockets of obscenely rich team owners and players. This is just corporate favoritism, and for the life of me I can't see why the owners and politicians are not in jail for corruption, the misuse of public funds, kickbacks, etc.

Stadiums are not analogous to public parks or museums. They do not operate in the public interest. They are simply businesses that produce a product.

Peter La Prade

January 10, 2009 @ 5:41pm

Fans of all sports have a rooting interest in their favorite players remaining with their team-at least during their most productive years. Owners and players interests are not necessarily the same as the fans', with owners needing/wanting to maximize profits vs. fielding the most competitive team possible, and players simply wanting to be paid a sum propotionate to their power-rankings relative to other players. What compensation model ( for the players) in general does the most justice to all three groups, and do player salaries necessarily follow some sort of power law?

Chuck

January 10, 2009 @ 9:20pm

Is there an economic explanation for why the American League has won 11 consecutive All-Star games (not counting the 2002 tie)?

ed temple

January 11, 2009 @ 2:39pm

The taking of public or private land for the benefit of a few sports connected millionaires is against everything upon which this nation is supposed to be based. I'm thinking of the surrender of city park land to the Yankees { Why didn't they demolish their old digs and build in the same place? ] and the Atlantic yard's theft of land and homes from those without the influence of Bruce Ratner and the Nets. What an injustice!

mfs

January 11, 2009 @ 8:53pm

Re: Posts 2 and 17: The problem is there is no level playing field between the big money owners and the taxpayers. The big money owners get what they need by paying for it with complexities, payments, gifts and gratuities to the people who are supposed to be watching out for the taxpayer: your local mayor, city council, board of supervisors or whatever. Those people cannot say 'no'.

Eliminate those people from the decision making process and add one person who will be paid a fee to negotiate on behalf of the taxpayer and the playing field will start to become more level. The deal should be a very simple investment on the part of the taxpayer no different from what a venture capitalist or bank would require as far as a return on investment.

Keep it simple, and then make it simpler.

c. perry

January 11, 2009 @ 9:08pm

Aid to team owner millionaires is good . Aid to poor unmarried women with children is bad. Is there something wrong with our thinking?

Paul

January 11, 2009 @ 10:07pm

Isn't building a football stadium where only 8-10 games per year is different from a baseball stadium which has 81 games per year? My guess is that far more out-of-town fans go to baseball games than football games, especially if they live in a city without baseball. In Baltimore, at least half of the fans root for the Red Sox or Yankees. While some are local, others travel to those games.
Along the same lines, if a new stadium were to seat 5,000 more people, and it meant 50,000 more fans attending (assume that 10 games were sold out) how much additional revenues would that bring to the city through taxes?